Entrepreneur Association of Tokyo
"How to Sell a Company" by Terrie Lloyd

When to sell
To maximize your value you should carefully consider and plan when to sell your company. The ideal time to sell is when you are in control and when profits are growing strongly. Your company’s value will be based on the previous year’s profits and so being on an upward profit curve allows you to ask for a much higher price. In Terrie’s experience 500 million to less than 2 billion yen companies are easier to sell in Japan. Any smaller than this and the due diligence and legal costs of the sale will outweigh the value of purchasing the company.

Other important factors in selling a company include being number one in a niche area and having a good mix of foreign and Japanese staff, especially Japanese male managers. These human factors can be a huge contributor to the valuation of the company and shouldn’t be underestimated. A mix of staff is vital because Japanese purchasers are likely to be looking for foreign staff that can provide an avenue to overseas markets and visa-versa foreign companies want Japanese personnel that can operate naturally in Japan’s business environment.

Reasons for selling include a desire to get out of the business or bankruptcy. If you’re ready to leave Japan or retire you need to plan a few years ahead and groom someone who you can pass the company onto to ensure continuity after you leave. However, if you’re leaving and haven’t planned in advance you shouldn’t just close down without exploring the option of selling. If your sale is forced because you have run out of money or the market is dragging your company may also be worth something even if only the value of tax losses.

What buyers want
The two main buyers are Japanese wanting access to foreign markets or foreign buyers wanting a “beach head” acquisition into Japan. In terms of value, the best buyers are those who want strategic value, and the best possible buyer is one with a global strategy but that isn’t in Japan yet. In this scenario you can even sell a loss-making company.

Getting ready for sale
Structuring your company for sale from very early on is vital and you must be careful with shareholders. When issuing preference shares consider how these will affect the future sale of the company and remember that some shareholders may not want to sell. Also be careful about retaining control and what percentage of the company you own. In Japan the magic numbers are 34% (gives veto rights) and 67% (can ignore veto).

Your company should also run like a well-oiled machine. As soon as you can afford it, set up a proper accounting system. This is a critical investment and will go very far in earning buyers trust. Also keep producing financial reports to show that you are serious about selling and that you are transparent. Ensure you take minutes at meetings and file all receipts as even a small thing missing may trigger alarm bells in a buyers mind. Finally, make sure you pay all taxes and get the rights to all IP such as trademarks, patents and even photos etc.

To make the company more attractive spruce up everything as you lead up to the sale. To boost profits you should cut all possible expenditures as an extra $1 of profit may translate to $15 dollars more in the sale price. Continuum of leadership is also very important. Therefore have two or three top people who will stay after you leave. To ensure this, give your top managers a vested interest in the company by giving them stock.

Be careful with how you deal with customers in the lead up to sale. Most companies get sold because they are in trouble and the last thing you want is bad PR, so even though you’re excited don’t tell your customers that you intend to sell. Just mention that you may have some new investors looking at the business. Also don’t neglect your customers. Protect your revenue by ensuring that you continue to serve your clients so that they don’t leave you at the last minute before your sale.

What is your value?
How much you can get is a factor of your profit curve and will depend on the purchase type. Ideally you’re in a strong profit growth phase and your company will be a strategic purchase for another business. In this case you can expect roughly 8-20 times your earnings. For practical purchases when your profit increases aren’t so strong you can expect roughly 5-10 times the previous years profit. In Japan if you may also be able to sell a loss making business for tax loss purposes. In this case the company is worth about 5% of the net tax effect. Companies may also be sold on their esteem value where someone wants the prestige of the brand or business type. Furthermore, some parts of companies are worth more on their own than as part of the whole, so a company can be broken up and sold separately. This way of spawning things off also gives career opportunities to your various senior managers who you can then share the sale with.

Post sale
Pay your shareholding managers appropriately and also award other staff with thank you bonuses of around 100,000 –200,000 yen. If you do happen to remain with the business,
stay in control of your spending because if you show that you have a lot of money then other people will want a piece of that. Just because you now have a lot of money in the bank it doesn’t make you invincible. Be careful with your next investments and the next business you make may be more difficult. It will take another five years to build another company so try and get a string of businesses going so you don’t have to start completely from scratch.

Use advisors versus trying to sell the company yourself
If you decide to do it yourself you are going to have a lot of work ahead of you, and considering that it may be the only time you will sell a company is it worth it and are you confident that you can do it well? Also do you have time to run your company and prepare it for sale at the same time? Advisors can help with profit boosting, cleaning up the company and keeping the deal secret. Moreover they know the tricks used to keep prices up and down. Japanese companies dislike auctions so advisors can also help search for buyers and get the best price by spiraling up through a series of potential buyers.

Q and A
Could you mention some sources for getting funds?
It really depends on what you are trying to fund. You can approach companies who would be interested in you strategically. Big companies are easy to get one to two million dollars from because these amounts can be floated to the board of directors easily, and also because big companies won’t want to own more than 15% of a company because it will require consolidation. Also people who have just done an IPO have lots of money to throw around and as long as you have a good story you should be able to get some money. Venture Capital is the hardest to get, but if you are able to get it, it shows that you’re on the right track.

Can you sell a website based business?
Yes, especially to another Net company with similar pages. In this case, two to three million page views per month will translate to a 30-50 million yen sale price

Is it better to sell privately or to conduct an IPO?
It’s best to think about the economics and all the people who will want a piece of the capital raised under an IPO. After ten years of hard work you may only end up with a small percentage of the overall money raised. Also you may have time limits imposed on share sales or when you try and sell your shares the price may be diluted. Therefore a private sale may earn you more money for less hassle and there is much less to worry about. Also smaller business are more fun and because they aren’t a threat to anyone or other big businesses because no one pays attention to you. Overall, how to sell comes down to personal preference

For further information about Terrie’s companies:
www.japaninc.com
www.japanconcierge.com
www.bios.jp
www.lincmedia.com

Summary written by Tim Coghlan.
Tim is a freelance writer in Tokyo and can be contacted at timkyo@gmail.com


May 09 , 2007 (Wednesday)
Terrie Lloyd, LINC Media & Japan Inc. Communications